Concept and Regulation in Italy

Transfer Pricing legislation in Italy is enacted in Article 110, paragraph 7, of the Italian Tax Code (“Testo Unico delle Imposte sui Redditi” – TUIR), approved by Decree No. 917 of 1986.

Arm’s Length Principle: Concept

The Arm’s Length Principle was implemented through the Ministerial Decree dated May 14, 2018. In transfer pricing, the range of values formed by the financial indicators, selected in the application of the most appropriate method relating to each transaction between independent third parties, which is also comparable with the related transaction, is considered to comply with the Arm’s Length Principle.

Definition of related parties in Italy

Article 110, paragraph 7, of the Italian Tax Code, as amended in June 2017, stipulates that transactions carried out between an Italian company and non-resident enterprises that: “directly or indirectly control the Italian company, or are controlled by it, or are controlled by the same company that controls the Italian company.”

Likewise, the Ministerial Decree dated May 14, 2018, specifies:

(a) “associated enterprises” refers to an enterprise residing in Italy, as well as non-resident enterprises, in which:

  • one of them participates directly or indirectly in the management, control, or capital of the other part; or
  • the same person participates directly or indirectly in the management, control, or capital of both companies;

(b) “equity stake in the management, control or capital” means:

  • an equity stake of more than 50% in the capital, the voting rights, or the profits of another enterprise.
  • dominant influence over the management of another enterprise, based on contractual or equity restrictions;
  • Transfer Pricing Methodology in Italy

According to Article 4 of the Ministerial Decree of May 04, 2018, in order to determine the market value of related party transactions, one of the following five methods may be used:

  • Comparable free price method.
  • Resale price method.
  • Cost plus method.
  • Transactional net margin method.
  • Profit split method.

It should also be noted that choosing one of the above methods should consider the functional and risk profile of the analyzed party.

Taxpayers may apply a different method to those mentioned above only if they can demonstrate that:

  1. None of those methods could be applied with reliable results to determine the price of a controlled transaction on an arm’s length basis, and
  2. Such a different method produces a result consistent with the result expected to be obtained by independent companies in the performance of comparable unrelated transactions.

There is no established hierarchy but rather the criterion of the most appropriate method. However, a “natural hierarchy” may, in practice, be considered to favor the comparable free price method and traditional transaction methods in general.

Comparability Analysis in Italy

In order to determine whether two or more transactions are comparable, Article 3 of the Ministerial Decree of May 04, 2018, collects the five criteria described in Chapter III of the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations:

  • The contractual terms.
  • Functional analysis.
  • The characteristics of the goods and services.
  • The economic circumstances surrounding the transaction.
  • Corporate strategies.

Transfer Pricing Documentation in Italy

Circular N°15 of November 26, 2021, of the Italian Tax Agency, provided the specifications on transfer pricing documentation. It focuses on the purposes and structure of the documents Master File and the “Documentazione Nazionale” or Local Report.

The Master File and the Local Report must be signed by the legal representative of the taxpayer, or by his delegate, through an electronic signature with a time stamp fixed at the date of filing of the affidavit. Likewise, they must be written in Italian, except in cases where the provisions on the protection of linguistic minorities are applicable. Only the Master File may be submitted in English.

The communication of possession of the documentation must be effected with the filing of the annual income tax return.

Master File

It contains information on the activities of the multinational group and the global allocation of revenues among different entities.

Documentazione Nazionale or Local Report

The Local Report complements the Master File, focusing on the local entity. It contains specific information on the peculiarities of the entity, as well as transfer pricing analyses related to transactions between this and related parties located in different jurisdictions.

Country by Country Report

Along with the implementation of the OECD Guidelines, Italy introduced a standard on the Country-by-Country Report filing in 2016. However, in February 2017, the details were defined in the Ministerial Decree N°23.

Multinational groups with total annual revenues equal to or greater than €750 million are contemplated. It will be effective for fiscal years as of January 1.

Transfer Pricing Penalties in Italy

Penalties range from 90 % to 180 % of the highest tax assessed and are applicable in case of transfer pricing adjustment applied by the Italian tax authority, if:

  1. the transfer pricing documentation does not exist,
  2. the Tax Authority does not recognize it as “the appropriate documentation” according to the Implementing Decree of September 29, 2010.

Non-compliance with the filing requirements and the Country-by-Country Report may generate penalties ranging from €10,000 to €50,000.

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 Author:       Wolfgang Hartl
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